StockTwits 50, June 4

• Posted by Ivanhoff
• on June 2nd, 2012

The market is sick. We are in a stage where fear is gradually overtaking common sense and is leading to a widespread loss of confidence. It took one month of decline for the $SPY to erase four months of gains. It is basically where it started the year. Many stocks are faring even worse.

The energy and basic material sectors have the lowest relative strength. Crude oil futures are in a free fall, losing 8% just last week as the “Iranian premium” is gradually dissipating and fear of global slowdown is embracing the world.

The U.S Dollar continues to gain ground against all major currencies (except the Yen), turning into a headwind not only for commodities, but also for many international companies’ earnings. Market has started to discount that a few weeks ago. Analysts are just starting to catch up and downgrade, citing the very same reason.

U.S. Treasuries gained another 6% and are trading at all-time highs. This is a humongous move for a typically slow-moving asset. There is no better indicator of current market sentiment. The protection of principle has become the main priority. Even gold is coming back to fashion as an alternative currency, gaining 4% last week. The shiny metal is still in a downtrend, but it is already outperforming $SPY year-to-date. It feels like we are re-living the summer of 2011 all over again.

In hindsight, the Euro-driven forced liquidation was a great buying opportunity back then. There is no reason to believe that it will be any different this time, but the devil is in the details. Buying forced liquidations is not psychologically the easiest trade and it is not for the faint of heart and for the ones on margin.

For the week, the St50 index depreciated by 4.9%. The S & P 500 and the Nasdaq Composite fell 3.2%. Last week’s price action turned out to be just a brief bounce from oversold levels. The trend is still down and it could easily get worse before it gets any better.

The St50 list consists of stocks that are holding their uptrends for the most part, but keep in mind that in high correlation markets, earnings growth is overshadowed by macro concerns. No real correction is over until the last momentum group is crushed. Remember the second half of last year. The market was in a similar trendless session that chopped everyone. Two weeks up, followed by two weeks down. Very high correlation. Most stocks were moving together in a group, disregarding of individual stocks’ catalysts. One by one, all momentum stocks were shot down. The correction didn’t stop until the last group – cloud and business software was taken down in late December. By the time the correction was done, there were no momentum stocks left. After that, it was all upside for three months.

Not every correction is that devastating, but this one sure seems on its way. The silver lining is that the deeper and the longer the correction, the bigger the opportunity afterwards. You don’t win in high-correlation markets. You survive them.

If you understand the incentives of those, who move the market, you will have an idea of their likely behavior. In bull markets, institutions have to chase not to fall behind their benchmarks. If you are underinvested in a bull market, you underperform and lose clients. In bear markets, almost everyone is down; therefore there is nothing to chase. People start to pay much more attention to risk and valuation, which makes many momentum stocks vulnerable. It is not that they are not growing earnings and sales anymore. Simply the perceptions have changed. And when expectations change, prices change. Sentiment plays a huge role as it defines how much risk people are willing to take and what multiples they are willing to pay.

Europe is on the brink of political and liquidity crisis. The market is watching terrified and singing “I wish you could step away from that ledge my friend.” The world is bracing for more turbulence. You know, one of those “once in ten years events” that have been happening twice a year lately. As it has always been the case, the sun will shine again. In the meantime, protect your capital and confidence.

See the daily charts of the St50 stocks on finviz; also weekly charts. Take a look at the About section to gain my perspective on how to use the St50.

You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.

Have A Great Weekend!

~ Ivan Hoff (@ivanhoff)

St50 June 4 New June 4 Removed June 4

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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